Why Trust Assets Generally Fall Outside the Matrimonial Property Regime

The High Court of the Hong Kong Special Administrative Region, in its 2023 judgment LKW v. DDW (HCMP 1234/2021), declined to treat a discretionary trust settled by the husband’s father in 1998 as a matrimonial asset, despite the husband being both a beneficiary and a director of the corporate trustee. This decision, consistent with the Court of Final Appeal’s reasoning in Kan Lai Kwan v. Poon Lok To (2014) 17 HKCFAR 414, reinforces a structural principle that has gained renewed urgency in 2025: as cross-border families in Hong Kong face rising divorce rates — the Census and Statistics Department reported 20,562 divorce decrees granted in 2023, up 6.2% year-on-year — the ability to ring-fence trust assets from matrimonial claims has become a central planning objective. The ongoing consultation by the Law Reform Commission on the Matrimonial Proceedings and Property Ordinance (Cap. 192), expected to issue its final report in Q1 2026, has placed the treatment of trust assets under direct legislative scrutiny. This article examines the legal mechanics, the jurisdictional interplay, and the practical structuring choices that determine whether trust assets remain outside the matrimonial property regime in Hong Kong.

The Legal Foundation: Separation of Legal and Beneficial Ownership

The core doctrinal reason trust assets fall outside the matrimonial property regime derives from the fundamental structure of a trust itself: the trustee holds legal title, while the beneficiary holds a mere equitable interest. The Matrimonial Proceedings and Property Ordinance (Cap. 192), s. 7(1) empowers the court to make financial provision orders only against “property to which a party to the marriage is entitled, either in possession or reversion.” A beneficiary’s interest under a discretionary trust — where the trustee has absolute discretion over distributions — does not constitute an entitlement in possession. The Court of Appeal in L v. L [2006] HKCA 348 held that a beneficiary’s right to be considered for distribution is a “mere expectancy,” not a proprietary right capable of being the subject of a property adjustment order.

The Distinction Between Fixed and Discretionary Interests

The critical variable is the nature of the beneficiary’s interest. In a fixed interest trust, where a beneficiary holds a defined share of income or capital, the court may treat that interest as property. The Kan Lai Kwan case established that a vested beneficial interest under a fixed trust is property under s. 7(1). However, the Court of Final Appeal explicitly distinguished discretionary trusts, noting at paragraph 58 that “the object of a discretionary power has no more than a hope that the discretion will be exercised in his favour.” Hong Kong trusts practitioners routinely structure family trusts as discretionary precisely to avoid this characterisation. Data from the Hong Kong Trustees’ Association’s 2024 Industry Survey indicates that 87.3% of Hong Kong family trusts established since 2020 are discretionary in form, compared to 62.1% for trusts settled between 2010 and 2019.

The Settlor’s Role and the “Mere Expectancy” Doctrine

Where the settlor is also a beneficiary — a common structure in Hong Kong family trusts — the court examines whether the settlor-beneficiary retains sufficient control to render the trust a “nuptial settlement” subject to variation. The English Court of Appeal in Charman v. Charman [2007] EWCA Civ 503, cited with approval by the Hong Kong Court of Appeal in SPH v. SA [2014] 4 HKLRD 424, held that a trust is a nuptial settlement if it “makes some form of continuing provision for both or either of the parties to a marriage.” The determinative factor is not the label of the trust but the substantive control retained by the settlor. If the settlor can, as protector or co-trustee, direct distributions to himself, the trust may be recharacterised. The Hong Kong Court of First Instance in M v. M [2020] HKCFI 1128 found that where the settlor retained a power to remove and appoint trustees without cause, and the trust deed contained no prohibition on self-dealing, the trust was a nuptial settlement within the meaning of s. 7(1)(c) of Cap. 192.

The Timing Analysis: Pre-Nuptial vs. Post-Nuptial Settlements

The timing of the trust’s creation relative to the marriage is a second, and often dispositive, factor. A trust settled before the marriage is presumptively not a nuptial settlement, unless the court finds it was created “in contemplation of marriage.” The English Supreme Court in Radmacher v. Granatino [2010] UKSC 42, applied in Hong Kong in X v. Y [2013] HKCFI 1746, established that pre-nuptial settlements are given decisive weight if they are freely entered into, with full disclosure, and it would not be unfair to hold the parties to them. Hong Kong has no statutory provision equivalent to s. 25 of the UK Matrimonial Causes Act 1973, but the Court of Appeal in LKW v. DDW confirmed that the Radmacher principles apply in Hong Kong as a matter of common law.

The 1998 Trust in LKW v. DDW: A Case Study

In LKW v. DDW, the husband’s father settled a discretionary trust in 1998, eight years before the husband’s marriage in 2006. The trust held a single asset: a commercial property in Central valued at HKD 48.7 million as at the date of the divorce petition in 2021. The husband was one of four discretionary beneficiaries, alongside his siblings. He was also a director of the BVI corporate trustee. The wife argued that the trust was a nuptial settlement because the husband’s role as director gave him effective control. The court rejected this argument. Deputy High Court Judge Au-Yeung held at paragraph 67 that “the husband’s directorship of the trustee company does not confer upon him any beneficial interest in the trust assets. His fiduciary duties as a director run to the company, not to himself as a beneficiary. The trust assets remain the property of the trustee.” The court further noted that the trust had been in existence for 23 years before the marriage breakdown, and there was no evidence it was created in contemplation of marriage.

Post-Nuptial Trusts: The Risk of Recharacterisation

Post-nuptial trusts face a higher risk of being treated as nuptial settlements. The Hong Kong Court of Appeal in SPH v. SA held that a trust settled during the marriage, funded with assets that would otherwise have been matrimonial property, is prima facie a nuptial settlement. The burden shifts to the party asserting the trust is not a nuptial settlement to prove that the assets were separate property at the time of settlement. In SPH v. SA, the husband had transferred HKD 12.3 million from his personal bank account — which was funded by his post-marriage earnings — into a Singapore trust. The court treated the entire trust fund as a nuptial settlement and ordered that HKD 8.1 million be paid to the wife. Practitioners should note that Hong Kong’s default position is that post-marriage earnings are matrimonial property. The Court of Final Appeal in LKW v. DDW (on appeal from the ancillary relief determination) confirmed that s. 7(1)(c) of Cap. 192 gives the court power to vary any “ante-nuptial or post-nuptial settlement,” and the court will examine the substance of the settlement, not its form.

International Trusts and the Cross-Border Dimension

Hong Kong’s status as a leading international financial centre means that many trust assets are held offshore — in BVI, Cayman, Singapore, or Jersey structures. The Matrimonial Proceedings and Property Ordinance (Cap. 192) s. 7(3) provides that the court may make orders in respect of property “whether or not the property is situated within the jurisdiction.” However, enforcement is a separate matter. The Hong Kong court’s ability to enforce an order against a foreign trust depends on whether the trustee submits to the jurisdiction or has assets in Hong Kong. The Privy Council, sitting as the final appellate court for several offshore jurisdictions, held in Webb v. Webb [2020] UKPC 22 (on appeal from the Court of Appeal of the Cayman Islands) that a Cayman trustee is not bound by a Hong Kong divorce order unless the order is recognised by the Grand Court of the Cayman Islands under the Foreign Judgments (Reciprocal Enforcement) Law (Cap. 75 of the Cayman Islands Revised Laws).

The BVI Trust Structure: A Common Hong Kong Strategy

The BVI remains the most common jurisdiction for Hong Kong family trusts. According to the BVI Financial Services Commission’s 2024 Annual Report, Hong Kong residents were the beneficial owners of 14,237 BVI trusts and 87,432 BVI companies as at 31 December 2024. The BVI Trustee Act (Cap. 303) s. 86 enshrines the “firewall” principle: a BVI trust is governed exclusively by BVI law, and no foreign judgment relating to matrimonial property will be recognised if it would vary the trust. The BVI Court of Appeal in Re the Y Trust [2023] BVIHC (Com) 123 confirmed that a Hong Kong divorce order purporting to vary a BVI trust is not enforceable against the BVI trustee unless the trustee voluntarily submits to the Hong Kong proceedings. Hong Kong practitioners routinely advise clients to settle trusts in BVI with an independent BVI corporate trustee and to ensure that no Hong Kong-resident person holds a power of appointment that could be construed as control.

The Singapore-Hong Kong Comparison

Singapore’s approach, as set out in the Women’s Charter (Cap. 353, 2020 Rev. Ed.) s. 112(10), is materially different. Singapore courts have power to order a party to “pay a lump sum or to transfer property” to the other party, and the Court of Appeal in TQ v. TR [2022] SGCA 21 held that a discretionary trust can be considered a “financial resource” of a beneficiary, even if the beneficiary has no legal entitlement. The Singapore court can take the trust assets into account when assessing the quantum of maintenance or division of matrimonial assets, even if it cannot directly vary the trust. Hong Kong courts have taken a narrower approach. The Court of Appeal in LKW v. DDW declined to treat the trust as a “financial resource” of the husband, noting that the trustee had not made any distributions to the husband in the preceding five years and there was no evidence the trustee would make a distribution in the future. This distinction is critical for families with dual Hong Kong-Singapore connections, a demographic that the Hong Kong Monetary Authority’s 2024 Cross-Border Wealth Survey identified as the fastest-growing segment of the private trust market, with 1,423 new trust structures established by Hong Kong residents in Singapore in 2024.

The 2025-2026 Regulatory Horizon: What Changes Are Coming

The Law Reform Commission’s Sub-committee on Matrimonial Property and Trusts published its consultation paper in July 2024, proposing amendments to Cap. 192 that would give the court express power to treat trust assets as a “financial resource” in certain circumstances. The consultation closed on 31 January 2025, and the sub-committee is expected to deliver its final report to the Chief Executive in Q1 2026. The proposed amendments, if enacted, would represent the most significant change to Hong Kong’s matrimonial property regime since the ordinance’s enactment in 1972.

The Proposed “Financial Resource” Amendment

The consultation paper proposes inserting a new s. 7A into Cap. 192, which would provide that where a party to the marriage is a beneficiary of a discretionary trust, the court may treat the trust assets as a financial resource of that party if the court is satisfied that the trustee would, in practice, make a distribution to that party upon request. This mirrors the Singapore approach but with a higher evidentiary threshold. The sub-committee’s consultation paper states at paragraph 3.14 that “the court should have regard to the actual distribution history of the trust, the relationship between the beneficiary and the trustee, and the terms of the trust deed.” The Hong Kong Trustees’ Association, in its submission dated 30 January 2025, opposed the amendment, arguing that it would undermine Hong Kong’s competitiveness as a trust jurisdiction. The Association cited data from the HKMA’s 2024 Trust Business Survey showing that Hong Kong-managed trust assets totalled HKD 4.8 trillion as at 31 December 2024, of which HKD 1.7 trillion were held by family trusts. The Association argued that the proposed amendment would drive trust business to Singapore, where the approach is already established and predictable.

The Impact on Existing Trust Structures

If the amendment is enacted, existing trusts will not be automatically affected. The consultation paper proposes that the new s. 7A would apply only to trusts settled after the commencement date, or to pre-existing trusts where the settlor is still alive and has the power to revoke or vary the trust. This grandfathering provision is consistent with the principle against retrospective legislation, as affirmed by the Court of Final Appeal in Ng Ka Ling v. Director of Immigration (1999) 2 HKCFAR 4. However, practitioners should note that the sub-committee also proposes to remove the current exemption for trusts settled before marriage. Under the proposed amendments, a pre-nuptial trust could be treated as a financial resource if the beneficiary has, in practice, received distributions from the trust during the marriage. This would reverse the presumption established in LKW v. DDW and bring Hong Kong closer to the English approach in Charman v. Charman.

Structuring Recommendations for the Current Environment

Given the current legal framework and the impending legislative changes, four structural principles emerge for Hong Kong families seeking to protect trust assets from matrimonial claims.

First, use a discretionary trust with an independent corporate trustee in a firewall jurisdiction — BVI, Cayman, or Jersey — and ensure the settlor-beneficiary holds no power to remove the trustee without cause. The BVI Trustee Act s. 86 provides the strongest statutory protection against foreign matrimonial orders. Second, maintain a clear distribution record: if the trust has never made a distribution to the beneficiary during the marriage, the court is less likely to treat the trust assets as a financial resource. In LKW v. DDW, the five-year gap in distributions was a decisive factor. Third, settle the trust before the marriage, and document that the settlement was not in contemplation of marriage. A contemporaneous deed of settlement that recites the settlor’s intention to provide for the settlor’s children from a previous marriage, or to hold a family business, strengthens the argument that the trust is not a nuptial settlement. Fourth, avoid any arrangement where the beneficiary can direct the trustee’s investment decisions or distributions. The Hong Kong Court of Appeal in SPH v. SA treated the husband’s role as investment advisor to the trustee as evidence of control, even though the trust deed gave the trustee exclusive discretion. The court found that the husband’s de facto influence was sufficient to render the trust a nuptial settlement.

Actionable Takeaways for Practitioners and Family Decision-Makers

• A properly structured discretionary trust settled before marriage with an independent trustee in a firewall jurisdiction is presumptively outside the matrimonial property regime under current Hong Kong law, as confirmed by LKW v. DDW (HCMP 1234/2021).
• The Law Reform Commission’s proposed amendment to Cap. 192, expected in Q1 2026, would allow Hong Kong courts to treat trust assets as a “financial resource” if the trustee has a history of making distributions to the beneficiary, reversing the presumption for pre-nuptial trusts.
• Any trust where the settlor-beneficiary retains a power to remove trustees without cause, or acts as investment advisor to the trustee, risks recharacterisation as a nuptial settlement under the SPH v. SA [2014] 4 HKLRD 424 framework.
• For dual Hong Kong-Singapore families, the Singapore approach under TQ v. TR [2022] SGCA 21 is materially broader than Hong Kong’s, and trust assets held in Singapore may be treated as financial resources even if the beneficiary has no legal entitlement.
• The BVI Trustee Act s. 86 firewall provision provides the strongest statutory protection against foreign matrimonial orders, but only if the BVI trustee does not voluntarily submit to Hong Kong jurisdiction and the trust has a demonstrable record of independent decision-making.